More Lessons in the Dismal Science

“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”
~ Murray Rothbard

Chances are that if you are a libertarian and have been in a discussion with, say, a progressive regarding economics or an economic proposal, then your position is dismissed in light of your opponents’ ideological sensibilities. For instance, if you are arguing against minimum wage then your counterpart may take it as you being against poor people. In a previous article I argued that while moral arguments have relevance and importance, economic arguments are more convincing and through economics others may be more amenable to the idea that there are some underlying moral principles involved.

The significance behind the quote above by Rothbard is that many times in debates with those who may be unfamiliar with economics is that they can be the loudest in dismissing economics as a whole (feelings and good intentions come first), or are extremely adamant in arguing for a specific economic policy/proposition that they favor but are unaware of the consequences of.

I am of the belief like Mises that economic understanding is a “primary civic duty”. As a libertarian, and as I have argued before, I think economics is an important tool in advancing our ideas, thus, like I have elsewhere, I will be discussing a few common objections to libertarianism raised by “an average voter” from an economic position for that purpose.

Abolishing Money

You have probably come across this argument before. The argument usually goes that because of materialism, greed, lobbying, dead unicorns, etc., that money should be done away with. In a nutshell, money is the root of all evil. This one is probably the easiest to address, and as much as I love Pink Floyd, they are wrong. First, to say that money, as a good, is the root of all evil is to make the absurd statement that indirectly trading is the cause of all evil. Nobody loves money for its own sake. It’s only ever a means, never an end. So if it’s to be critiqued it would probably have to be picked apart pretty carefully to try to discover what’s actually being proposed, which is usually it should be done away with in favor of pursuing more “humanitarian” ends.

My challenge to you is whenever you encounter this argument is to ask the person what they suggest as an alternative in its place, which is typically one of two things: No exchange at all or barter. No exchange is rather simple. In the most basic way I can explain, imagine all the stuff that you do from the moment you wake up to the point that you go to bed. Then imagine all the stuff that you use on a daily basis, including what you wear, eat, use for transportation, and so on. All of the stuff that I mentioned you got through exchange, and all of it is stuff that you would need to provide yourself. And if that doesn’t scare you enough, now factor in how many hours there are in a day then subtract hours needed for sleep while possibly needing to forego much sleep to spend hours obtaining the things you need for survival. Let that sink in.

Now let’s look at barter, which is inefficient for well-known reasons, but probably more importantly, it doesn’t let you calculate. With money you can look at a good and its price, and instantly work out what you’d be giving up to buy it, because you don’t have to convert that price into units of all other possible media of exchange. Like, “This widget will cost 6 coconuts, which I could use to get 18 bananas, which I could trade for 10 lbs of butter, which would buy 1/53rd of a horse.”

“If Jones hires some laborers to build a house, with what will he pay them? With parts of the house, or with building materials they could not use? The two basic problems are “indivisibility” and “lack of coincidence of wants.” Thus, if Smith has a plow, which he would like to exchange for several different things—say, eggs, bread, and a suit of clothes—how can he do so? How can he break up the plow and give part of it to a farmer and another part to a tailor? Even where the goods are divisible, it is generally impossible for two exchangers to find each other at the same time. If A has a supply of eggs for sale, and B has a pair of shoes, how can they get together if A wants a suit? And think of the plight of an economics teacher who has to find an egg-producer who wants to purchase a few economics lessons in return for his eggs! Clearly, any sort of civilized economy is impossible under direct exchange.”

Thus, with money I can not only buy a computer without wondering whether its owner has any use for butter, I can be confident he and almost all other sellers of all other goods will accept this particular good in exchange. Humans benefit from exchange which follows from money, and unless one thinks that things like food and shelter — even in their most basic forms — flow magically into our mouths with no effort and structures magically materialize around us to protect us from the elements, then you must concede that this is not mere assumption, but axiomatic fact.

“Privatization” Bogeyman

Libertarians are strong supporters of privatization, I don’t think I need to go into details of why this is the case. Unfortunately, to an average person on the street the term “privatization” sends up red flags. Like other terms such as “capitalism” or even “libertarian,” the term “privatization” encompasses much of what they disdain.

There are numerous reasons why this position is considered, but the reason that we will be focusing on is, well, that the term privatization doesn’t mean what they think it means. Take for instance the drought affecting California. There’s an old Milton Friedman joke about if the government were in charge of the desert, there’d soon be a shortage of sand. There’s a similar point to be made about a state with an 840 mile coastline, whose government controls the water supply. A libertarian would typically call for privatization or letting the market handle it. Usually if you are to discuss this route, your big government counterpart would invoke certain bogeymen such as Blackwater or “private” prisons as an argument against it, at the same time conceding that private management works quite well in other areas.

The call for mere privatization does not get at the genuine reason why the private realm works better than the political. The upside of the private sector is not private ownership all on its own but that in the private realm entrepreneurs compete with each other. If the ends are for efficiency in providing resources, privatization is certainly necessary but not a sufficient condition. This is why I, and other libertarians, are not saying merely “privatization” of government services when “privatization” is suggested, but de-monopolizing, privatizing, and allowing competition.

Assume for the sake of discussion that your local government allows a public utility such as water to be privatized. What this usually means is versus the state running the firm itself, the state gives the monopoly privilege to distribute water to the firm with the highest bid, such as the case with Bechtel or gas companies and some public transportation. Regardless of the fact that firms may compete with each other for the contract, they still end up with a monopoly privilege in the area or region. Looking at it from a consumer’s standpoint, a monopoly in the government realm was replaced by one in the private realm.

Private monopolies may be more efficient than state monopolies, albeit marginally, presumably because they have to get the contract renewed by the state and if only because private firms have a bottom line. There may be stronger incentives in this case versus the political realm since in the political realm you can’t change anything delivered by the government without waiting 2-8 years and going through the process of voting, petitioning, and so on. Yet, keep in mind that the private monopoly only needs to appease those who give the monopoly privileges which is the state and not the consumers (save for their ability, if they can form an informed voting majority, to change the policy in 2-8 years). The amount that we as consumers gain from replacing a government monopoly for one that is private is not at all clear.

Let’s assume instead that the state got out of the way altogether which would allow any firm that wanted to sell water to consumers do so. That is, de-monopolizing, privatizing, and competing firms. Doing so would result in genuine competition among distributors (potential or otherwise), pressuring water providers to serve consumers well, as opposed to bureaucrats and politicians who grant monopolies. Competition motivates firms and businesses to provide lower cost goods and better quality to consumers rather than political benefits to agents of the state. Sure, private ownership begets competition. However, private ownership all on its own does not go far enough. The foundation of the private sector’s effectiveness is de-monopolizing along with competition.

This stance usually will lead to your counterpart asking how it would be done in the private sector. One thing to keep in mind is that public utilities like water are on a list of services which the state has provided and in most cases monopolized for as long as anyone can remember. Another is that there is a complete lack of even an attempt to investigate whether these things have ever been provided by private for-profit enterprises, let alone whether the state actually outperforms them in terms of cost, quality and so on. Also, one must realize, as Rothbard argues that, “No one can predict the number of firms, the size of each firm, the pricing policies, etc., of any future market in any service or commodity. We just know — by economic theory and by historical insight — that such a free market will do the job infinitely better than the compulsory monopoly of bureaucratic government.”

The important thing in our water scenario is that there will (or rather, must, or it doesn’t count) be free-floating prices responding to supply and demand. If water is scarce and prices rise accordingly, marginal consumers of water (barely-profitable farmers, say) will go looking for solutions (including but not limited to leaving a drought-stricken California). Household consumers will seek to economize, but that’s a relatively small part of the demand pressure. Producers will — well, they’ll actually exist instead of waiting for God to drop water into their laps. They’ll have available solutions like bringing water from elsewhere by various means like pipelines and even trucks or trains, desalinating seawater, probably many others that aren’t immediately apparent. The scarcer water gets, the higher the price gets, and the stronger the incentive to “produce,” becomes. Not only that, but means of production not currently considered cost-effective will become so, as shale oil is cost-effective to extract at higher oil prices.

All that said, sadly, the fallacy of “privatization” is the same fallacy that many, many individuals fall prey to when they discuss “privatized” (but in reality state granted monopolies in continued cahoots with the state) anything and say, “You see! This is why the state has a role to play in X! Look how bad X privatization has turned out!” Privatization doesn’t mean “handing control of the monopoly over to a nominally private firm.” It means the state gets the hell out of the damn business.

“Hoarding”

The last topic to go over is “hoarding.” Many say it is damaging to the economy because it reduces the availability of cash or resources which changes its value, because it stops the flow of circulation, or that people doing the “hoarding” should be reinvesting it in the economy (I assume that means they should be spending it, which of course ends up being justified on the same grounds as government spending and stimulus.)

There are a few fallacies related to hoarding but for starters, even if the first part of the objection were true (and it isn’t), there is no harm caused by “hoarding.” For one, there is no such thing as “hoarding” — only a third party’s judgment that another is saving “too much.” And any money that is held for a period of time in a “hoard” either lowers prices for everyone else (if they really do keep it in a safe at home or whatever) or is loaned out by a lending institution to increase capital accumulation which leads to a more productive economy and thus higher wages. It encourages saving and natural capital markets to operate without regulatory “nannies” and a central bank distorting the current future demand for money. When individuals “hoard” their money, they leave it in a bank. The bank, in turn, reinvests that money which goes towards private investment. Those private investments then go out to one of two things: either to expand an already existing business, or to create a new business, which, of course, creates jobs. When there’s less money in the banks because the money is taken out of them, there is less money going towards private investment and employment growth is stalled as a result.

Second, what exactly is “hoarding”? How much money (for example) do I need to save before it stops being called just “saving”? Then, why do people “hoard”? I save money because I plan to spend it later. There is no other reason to save it. With real resources — land, say — I might buy it up because I plan to use it later (live on it when I retire, perhaps) or for speculative purposes — perhaps I think it will fetch a higher price in the future than now. If I’m right about that, I profit by preserving it for that future valuable purpose rather than having it put to use now in a less valuable pursuit that would either supplant the more valuable one or have to be expensively and wastefully unwound (replacing a parking lot with a farm or an office building or vice versa).

Anyway the specifics depend a lot on what’s being set aside (“hoarded”) but the analysis is generally the same — it’s being set aside for future use by its owner or a future owner.

Another theory is that if consumers believe prices will continue to go down, they will put off buying things to get a better deal. Because this would reduce spending, producers would then be in a bind and lower prices to lure in the few people who are spending. And so on and so on until we’re all out of work because no one has bought anything in years and years. (I exaggerate for effect but the basic idea is what they propose.) Sounds silly, right? It is. Tell me, what do you think the price of a smartphone will be in a year or two? Not counting inflation, do you think they will be more or less powerful? Will they be more or less expensive? Given that everyone knows the answers to these questions are more and less, respectively, why would anyone buy a phone now? Oh yeah! Because they damn well need or want one right now. They may put off the purchase for a few months, but they don’t wait forever.

Further, and this was referenced above, there is the assumption that spending (or consumption) is what drives the economy, which is false. While consumption and production is a reciprocal cycle, this is not a case of the chicken or the egg. People cannot consume what does not exist. A thing must be created before it can be sold. An iPad must exist before a buyer can demand one. In the beginning, a person must sacrifice, work harder, go without, and/or take out loans (which are available because of others’ production) so that they can raise the level of their productivity. If they are producing goods that others find valuable, they will be able to trade and be successful. The increased amount of production lowers prices and allows for greater consumption. How? In general, every product is in competition with every other product in the marketplace. Because consumers have finite amounts of money to spend, they must choose which of all the options they would like to purchase the most. If you spend your money on a round of golf, that may mean going without the 40 oz. porterhouse steak. Production is what gives people a greater ability to consume. Greater production means greater wealth. As they create and trade more, their wealth increases, in turn giving them the ability to consume more. And as long as production lags, so does income.

Lastly, there are certainly other factors that influence production . The uncertainty that you will be able to sell more goods might very well be enough to discourage more production. When there is a recession, when confidence is low, or when the future looks uncertain, consumers tend to save more and spend less. And reciprocally, this causes production to slow. The solution to uncertainty in a market? Remove the most uncertain element — government interference. Aside from bureaucratic meddling, the only other real threat to long range planning, production, and prosperity is natural disaster which itself can be mitigated through proper insurance.

Conclusion

Bastiat and Hazlitt both spoke of the unseen in economics, which through its study, your opponent hopefully will begin to see implications and consequences of the positions they argue for. The examples I went over are rather basic, but planting the seed is how you start. Economics can change ideology. I always recommend going through economic consequences before ideology is discussed. Showing that government stimulus hurts poor people will reach more people than “taxation is theft.” When it comes to economic policy, most people have the same ends in mind such as having less poor people or the leaving the disadvantaged better off, yet we only disagree on how to achieve that, which is what economics is for. Keep in mind that economics can’t tell you anything is “bad,” e.g., “inflating the money supply is bad”; economics makes no moral judgments, however it can tell you about the repercussions of a certain action or policy. Through this “dismal science” you can find that interventions brought about by the state don’t always result in what was intended, and that as human beings we dislike most of the consequences, thus finding ourselves objecting to such interventions on humanitarian grounds: “If you want better quality and lower prices, less impoverishment, and so on, then you probably don’t want X policy as an ongoing result or may want to reconsider your position on this proposal.” With economics, the unintended consequences of a given policy or proposal can be constantly exposed and allows us to see that the same desire that most people have would be better served without that policy or proposal. I study economics and discuss it with others for the purpose of convincing individuals to look past politics and ideology for social problems they seek solutions for, and economics is a great tool in achieving this goal.

Lots of good food for thought here. I live in an extremely progressive county, but I am always amazed at how few people I meet are actually proponents of government solutions. With little effort, it’s not hard to find some common ground on the important issues. As for myself, I almost never use the term “capitalism” because a conversation can quickly get stymied by the realities of “crony capitalism.” The same goes for “privatization,” where so many real-world examples show the collusion between the State and the well-connected (Russian oligarchs come to mind). And on the thorny issues, like minimum wage, I find that a two-step process — first, acknowledging that the other person may have commendable intentions, and second, by steering the conversation to “unintended consequences,” it’s easier to have a worthwhile conversation. Thanks for the article.

You had me up until saying you don’t use the word “capitalism”. Sure, it’s tainted, but for the same reason why call yourself a libertarian since it has the same results? As I write here, dropping the term while retaining the concept buys us nothing.http://wti.liberty.me/2014/11/08/anti-capitalism-a-love-story/

I’m certainly not “anti-capitalist,” and hadn’t heard that term until I read your other post. Toward the end of your other post, you noted that “depending on context” you might use a term like “freedom” or “economic freedom” — that’s really all I meant.

@jeffpetersonii Agree on the definitions. You and I may simply have a different approach when broaching our liberty / anarchy / capitalism beliefs in casual conversations. I’m happy with how my approach works for me.

I have no qualms with advancing liberty, however my main discrepancy was having an aversion to the term “capitalism”. I think it is rather inconsistent to shy away from using it because of how other people think of it but continue to use libertarian or other terms that have the same reaction. You don’t abandon terms merely because of how people will take it. “Economic freedom” is ambiguous and doesn’t specify what type of property rights, etc.

Regarding your second point on privatization, I think a bit of history can give you plenty of ammunitions. Virtually all “public services” were at some stage in private hands and in competition. Education for example was absorbed by the states in the second part of the XIX century, and I seem to remember that at that time 95% of people living in the US was literate. Even those cornerstones of microeconomics books, the lighthouses, were originally private, there is a beautiful essay of Coase on that. On a slight different issue, eminent domain, the history of the first pipelines in Pennsylvania makes the same point. The most difficult matter is of course security and judiciary. Apart from the stuff of David Friedman, a good example can be found in The law of the Somalis, written by Spencer MacCallum and a Dutch guy.